Macro Notebook 9/22: Russell 2000 | USD | Commodities

Daily Trading Ranges, Refreshed [Unlocked]

Editor's note: This is a complimentary look at Daily Trading Ranges, our daily proprietary buy and sell levels on major markets, commodities and currencies. This note was originally published September 22, 2014 at 07:32 in Daily Trading Ranges. Click here to learn more.

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 13 bps.

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Monday Mashup: PBPB, TAST and More

Investment Ideas

The table below lists our Investment Ideas as well as our Idea Bench -- a list of potential ideas that we are in the process of evaluating. We intend to update this table regularly and will provide detail on any material changes.

Notable Callouts

We are removing short PBPB from both our Best Ideas and Investment Ideas list. Note to follow shortly.

JMBA introduced made-to-order Energy Bowls in stores nationwide. "Jamba's new Energy Bowls are a nutritious blend of real, whole fruit and soymilk or fresh Greek yogurt, topped with an assortment of dry toppings and fresh fruits."

DNKN announced its commitment to 100% sustainable palm oil for all Dunkin' Donuts U.S. restaurants by 2016.

SONC announced its FY15 outlook which includes EPS growth guidance at the high end of its 14-20% long-term target, positive same-store sales in the low single digit range, drive-in-level margin improvement of between 50 to 100 bps and more.

Thursday, September 18th

DRI sent a letter to shareholders urging them to vote the BLUE proxy card "FOR ALL" of Darden's nominees. In the letter, Darden fired shots at two of its former employees - former Olive Garden President Brad Blum and former Olive Garden executive Bob Mock - who are currently working in advisor roles to activist Starboard Value.

MCD increased its quarterly dividend by 4.9% to $0.85 from $0.81.

TAST exercised its right of first refusal to purchase 30 Burger King restaurants in eastern North Carolina for a total purchase price of $20 million payable in cash. Carrols plans to sell these properties and lease them back for net proceeds of $13 to $14 million. Assuming the low end of that range implies that TAST is buying 30 locations for $7 million or approximately $233,333 per unit.

Sector Performance

The SPX (+1.3%) outperformed the XLY (+0.2%) as both casual dining and quick service stocks, in aggregate, outperformed the XLY.

XLY Quantitative Setup

From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.

Casual Dining Restaurants

Quick Service Restaurants

Howard Penney

Managing Director

Fred Masotta

Analyst

Share

Print

09/22/14 08:06 AM EDT

Small Caps Struggling

Client Talking Points

RUSSELL 2000

The Russell 2000 sadly, closed down -1.4% on BABA day and is down that much for the year-to-date. The bubble in illiquid/small cap stocks (over 50x trailing earnings) will only be clear in hindsight, but we remain bearish of it in the meantime vs. big cap liquidity on the long side.

USD

The biggest ramp in USD since 1997 has embedded some serious correlation risk into macro markets – on a 30-day correlation basis (which the machines chase), USD and SPX have a positive correlation of +0.68, whereas Brent Oil and Gold have negative correlations of -0.86 and -0.95, respectively. USD big time overbought signal too.

COMMODITIES

Correlation to USD remains as obvious as the round trip move the CRB Index has had during 2014 – on a 90 and 120 day basis the USD correlations to the CRB Index are -0.81-0.83. In our GIP model, this is called a Quad 4 move (when both growth and inflation are slowing, at the same time = #deflation).

Asset Allocation

CASH

40%

US EQUITIES

4%

INTL EQUITIES

16%

COMMODITIES

4%

FIXED INCOME

32%

INTL CURRENCIES

4%

Top Long Ideas

Company

Ticker

Sector

Duration

EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.

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